Reference Based Pricing and Self-Funded Plans: What Insurers and Employers Need to Know

It’s been well established that healthcare costs can vary by as much as 500% for the exact same service—even within the same geographical region. To put this into perspective, envision one store charging $2 for a can of soda, while another establishment on the same street charges $10 for the exact same can.

Currently, prices for medical services are generally opaque. Even large insurers often don’t know what price other payers are receiving for the same service. This makes it virtually impossible for insurers or healthcare consumers to effectively compare prices between different healthcare providers.

Again, this is contrary to the way other markets work in our society. If the goal is to fly from New York to Chicago, there are dozens of websites that can help consumers compare different options and prices. No such service exists for someone who needs hip replacement surgery.

Consumers (along with their insurers and employers) do not know for sure whether they are paying a fair price. This fact continues to frustrate insurance brokers, benefits administrators, and employees alike. But there is a potential solution: Reference-based pricing (RBP).

How RBP works

The basic idea behind RBP is that healthcare providers must be transparent in revealing prices for services. They must also disclose Medicare fees.

Armed with this information, insurers and employers can then set fixed limits for how much they will pay for a given service. Medicare fees can be used as a basis for comparison. So, for example, an employee might determine that 200% of the Medicare cost is the fixed limit. In that case, the employee would pay no more than $2,000 for a service that costs $1,000 under Medicare.

The RBP model is a particularly good fit for self-funded health plans, which are currently on the rise. Greater transparency allows insurers to negotiate better prices..

The possible pitfalls and limitations of RBP

Insurers and employers need to realize that RBP is not a panacea for all high service costs. In fact, there are several potential issues with RBP.

For example, RBP is unlikely to work well for emergency health services. Neither employee nor employer has the opportunity to shop around for the best price prior to receiving the service.

To work well, RBP requires a decent-sized pool of healthcare providers to compete against one another on the basis of price. As a result, it may be less effective in rural areas with a limited number of providers, or when negotiating prices for services that are only offered by a few providers.

Additionally, the Affordable Care Act (ACA) has strict provisions that limit patients’ out-of-pocket expenses for in-network healthcare costs. Consequently, self-funded employers  must take reasonable measures to ensure fair access to providers who offer services at the reference price (or close to it).

Plans must address five criteria for ensuring fair access:

  1. Type of service: Do plans provide fair access to services?
  2. Reasonable access: Do employees have access to a reasonable number of providers who offer the given service?
  3. Quality standards: Are there procedures in place to ensure that the services meet standards for quality?
  4. Exceptions process: Does the plan include an exception process for situation where a quality service is not available at a reference price?
  5. Disclosure: Does the plan adequately disclose information about pricing structure to employees?

Failure to meet these requirements can be deemed as a violation of the ACA.


RBP in practice: the Montana experiment


Still, it is very possible to successfully implement RBP. For proof, we look at the state of Montana’s experiment with RBP.

In 2014, the state legislature wanted to lower the cost of healthcare for state employees because the growing cost of healthcare was inhibiting wage growth. Legislatures mandated that the state’s Health Care and Benefits Division figure out a way to curb costs.


The Division turned to RBP for a potential solution. Montana did business with 60 hospitals, which accounted for 43% of total health costs for state employees. At the time, prices were highly variable across the state; some hospitals charged three to six times the Medicare rate for services. Like most payers, Montana was negotiating with providers based on list prices, provided by the hospitals themselves.


That would change. Now, the state would tell hospitals how much it was willing to pay for services, using the Medicare rate as a reference. The state determined that it would pay 234% of the Medicare rate on average. Despite some initial resistance from regional hospitals, Montana implemented the system in 2016.

So, did it work? Evidence overwhelmingly suggests that it did. This year, Montana will save an estimated $15.6 million in healthcare costs thanks to RBP. Although some critics predicted that the plan would cause employees’ bills to skyrocket, that doesn’t seem to have been the case. Additionally, Montana hospitals remain financially sound.


Many experts predict that more state employment plans will implement Montana-style RBP in the near future.



RMTS, LLC is one of the largest privately owned MGUs in the country. Founded in 1986, RMTs provides Brokers, TPAs and its Insurance Carriers with over 30 years of stop loss medical insurance expertise. Staying in front of an ever evolving marketplace, RMTS is committed to reducing our clients’ costs and managing their risk.

Request a Quote